Google Broadband, Trouble at Qualcomm Sinks Broadband HOLDR (BDH)

by on March 8, 2010 | ETFs Mentioned:

Despite the increased need and demand for many broadband services, the first two months of 2010 have not been very kind to the Broadband HOLDR (BDH), which has already slumped by more than 10% on the year. This disappointing stretch comes after a superb 2009 that saw the fund post a 38% gain. Why the sudden reversal? Increased competition in the sector is partly to blame for the downturn, as the battle over market share has become an increasingly fierce competition. Another driver of the disappointing performance has been Qualcomm, an industry leader off to a rough start this year.

Like many HOLDRS products, BDH maintains large concentrations in a handful of individual stocks. As such, unlike most diversified ETFs, these funds can be (and often are) impacted by company-specific developments at major constituents. For BDH, the largest holding is Qualcomm, which makes up a whopping 55% of the total assets. In a distant second is Corning (14%) followed closely by Motorola (11%). The rest of the fund is spread out among 13 other stocks.

Qualcomm Problems

Qualcomm shares are off by more than 15% since the start of the year, which has obviously had a material negative impact on BDH. Disappointing quarterly numbers at the end of January (the company missed earnings estimates by six cents) are a major reason for the year-to-date loss, as is a cut to the full year outlook. Soon after the earnings release, two firms cut their opinions on QCOM to neutral or hold. “A subdued economic recovery in developed regions, including Europe and Japan, combined with relative strength at the lower end of the market, is changing our estimated 3G device average selling price and chipset mix for this fiscal year,” CEO Paul Jacobs said in the earnings statement. This sent shares tumbling 10% in a single day, and QCOM is yet to recover.

Google Broadband

Another aspect to consider for broadband stocks, at least in the near future, is the impact of Google’s plans to tap into the market by bringing ultra-high speed service to test markets later this year. In the plan released early last month, Google plans to build and test a high-speed fiber optic broadband network capable of allowing users to surf the Web at a gigabit a second, or about 100 times the speed of existing broadband connections. These trials could be offered in several communities and extend to as many as 500,000 people including Topeka, Kansas which has unofficially changed its name to “Google, Kansas” for the month of March in hopes of wooing the internet giant to the city.

Some aren’t convinced that Google will actually be able to make a difference in the market given the small sums it is spending on the project. Industry analysts have called the move a “PR stunt” designed to entice firms to upgrade the existing infrastructure. While it remains to be seen what effect, if any, Google will have on the market, the search giant’s presence is no doubt causing heartburn for existing broadband suppliers and the broadband HOLDR as it struggles to move into positive territory for 2010.

BDH

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Disclosure: No positions at time of writing